U.K. Regulators Push For 10-Year Bonus Clawback For Misconduct

The U.K. could soon have one of the most clearly defined regulatory systems in the world when it comes to ethics in the financial services industry.

A new framework announced this morning aims to further align risk and individual reward in the banking sector to discourage irresponsible risk-taking and short-term thinking - and to encourage more effective risk management.

It includes the possibility of 10 years bonus "clawbacks" for those at the very top of an organization found guilty of misconduct. More broadly, all staff taking "material risks" can have bonuses deferred for five years, with seven year deferral for senior staff.

It is a clear statement aligning the U.K.'s corporate governance Code - which advocates toning "from the top" - with reality in financial services. The higher you go, the more stringently you must be accountable for your actions.

"Effective financial regulation involves creating appropriate incentives to encourage individuals to take greater responsibility for their actions. Our intention is that people in positions of responsibility are rewarded for behavior which fosters a culture of effective risk management and thus promotes the safety and soundness of individual institutions" said Andrew Bailey, deputy governor for Prudential Regulation, Bank of England and CEO of the Prudential Regulation Authority (PRA).

A view shows the Canary Wharf business district in London, which includes the headquarters building of HSBC with the National Maritime Museum in the foreground, Tuesday, June 9, 2015. HSBC Holdings, Europe's largest bank by market value, will cut up to 25,000 jobs globally to reduce costs and shift its center of gravity further toward the fast-growing Asian economies where it started operations 150 years ago. (AP Photo/Matt Dunham)

New rules also intend to prohibit variable pay for non-executive directors in the boardrooms of banks, building societies and PRA-designated investment firms, including the U.K. branches of non-European Economic Area (EEA) headquartered firms.

This amounts to a ban on bonuses, but is also likely to mean greater scrutiny of levels of variable pay at a time when headhunters and boardroom consultants are already beginning to squeal about the impossibility of finding appropriate people to be non-executive directors in the City.

Sir Philip Hampton, the outgoing chairman of the
Royal Bank of Scotland (RBS) reportedly told headhunters this week that he would "rather be tortured than take another role at a bank." In just a few months Sir Philip is moving on to the pharmaceutical sector, as chairman of
GlaxoSmithKline, after six-and-and-a-half years at the top of RBS.

Tougher rules from the regulators will affect RBS, as it will any firm in receipt of money from the taxpayer. "No variable pay, including all discretionary payments should be paid to the management of a firm in receipt of taxpayer support," it said.

"Today's rules are part of a wider package that is being announced over the summer to embed an accountable culture in the City. Our rules will now mean that senior managers face clawback of bonuses for up to 10 years, if misconduct comes to light" said Martin Wheatley, CEO of the FCA.

Martin Wheatley, then Chief Executive-designate of the Financial Conduct Authority, delivers a speech at Mansion House in the City of London on September 28, 2012 CARL COURT/AFP/GettyImages

This, he said, is "a crucial step to rebuild public trust in financial services, and allows firms and regulators to build long-term decision making and effective risk management into people's pay packets."

But the lobbying around remuneration in the City by the consultants who stand to benefit from higher pay levels has already begun.

"As promised by the Government, the U.K. now has the toughest bank pay rules in the world. The biggest concern for banks headquartered in the U.K. is the uneven playing field that now exists between the U.K. and the rest of the EU, adding to the existing differences between the EU and the rest of the world," says Jon Terry, partner and pay expert at PwC.

Regulators, he suggests, are hoping that the rules will help re-build trust in the City when "experience suggests that structural pay changes have limited impact on behaviour."

"We would encourage regulators to focus on creating a positive culture in which ethical behaviour is a result of employees' intrinsic motivation as opposed to fear of negative consequences," he adds. PwC research on this subject was considered earlier this week.